Current Mortgage Finance Executions July 8, 2016 Donald Peterson donald.peterson@raymondjames.com
HFA SINGLE FAMILY MRB ISSUANCE (2000 – 2015) $30 $25 Volume ($ Billions) $20 $15 $10 $5 $ ‐ Source: Thomson Reuters. Does not include NIBP Program Bonds. HFA single family bond volume in 2014 and 2015 was approximately 20 ‐ 30% of volume in 2007 peak. 2
LOOKING BACK AT LOCAL HFA SINGLE FAMILY BOND ISSUANCE Traditionally HFAs issued tax ‐ exempt mortgage revenue bonds (MRBs) to provide funds (up ‐ front) to allow HFAs and their lending partners to originate mortgage loans over a limited origination period (less than 42 months). HFA would fund up ‐ front COI, reserves and negative arbitrage. Limited risk to HFA (recoupment of COI and negative arbitrage). Mortgage rate “locked ‐ in” – lenders had generous time allotment to deliver loans Premium price of Bonds was potential source of DPA . HFA benefits from issuer fee and residual (determined by mortgage prepayment speeds). 2000 ‐ 2004 – Private Placements & Public Sales of Bonds Variety of Local HFA bond structures “privately placed” (rather than publicly sold) to Fannie Mae, such as the tax ‐ exempt forward delivery to eliminate negative arbitrage Publicly sold structures: serial bonds/premium PAC bonds/term bonds 2005 ‐ 2007 – Monthly “Pass ‐ Through” Tax ‐ Exempt Single Family Bond Issues stepped coupon & synthetic stepped coupons to eliminate “negative arbitrage” Fannie Mae and Freddie Mac very active bond investors 2008 – Onset of Financial Crisis / Traditional MRB Financing Methods No Longer Worked 2009 ‐ 2012 – US Treasury’s “New Issue Bond Program” (NIBP) 3
WHY IS SINGLE FAMILY BOND ISSUANCE DOWN? Post NIBP it has been difficult for HFAs to create competitive single family programs funded through traditional mortgage revenue bonds (MRBs): • Tax ‐ exemption at these historically low interest rates is less meaningful. • Low rates has similar effect on multifamily financings, with lower long ‐ term rates found through lenders/direct placements (tax ‐ exempt mf bonds generally 2 year “escrows”). • DPA now is the primary distinguishing factor for HFA single family programs. • For example, the partnership local HFAs have with Florida HFC enabled local HFAs to help use the subprime settlement moneys as DPA, driving up production for many local HFAs. HFAs can create a competitive single family mortgage product using MRBs generally by subsidizing the new $$ mortgages through (1) a refunding component (though there will be fewer opportunities post 2017), (2) resolution/balance sheet strength, or (3) 0% participations from prior MRBs. • Vast majority of single family MRBs issued in the last few years have been issued by state HFAs; only a handful of local HFA single family MRBs have been issued since NIBP ended. In the current market, most HFAs have chosen “TBA” (a non ‐ bond execution) over MRBs , which is why MRB volume is only a fraction of what it was in 2007. • Notably, many HFAs using TBA are experiencing their best single family production levels ever. For local HFA clients, RJ generally has seen higher loan volume & higher HFA program income for TBA programs over the past 2 ‐ 3 years, than for their prior bond programs. 4
WHY ARE HFAS USING “TBA” TO FUND SINGLE FAMILY PROGRAMS? TBA , either directly or through a 3 rd ‐ party program (such as Raymond James’ “Turnkey” program), has become the primary funding mechanism for state and local HFA single family programs nationwide , instead of through MRBs, due in large part to: • TBA/“Turnkey” provides a higher NPV return ($$) to the HFA using TBA than through tax ‐ exempt bonds (assuming same mortgage rate and loan type); • TBA/“Turnkey” allows broader homebuyer universe (e.g., borrower income not required to include household income; no 1 st ‐ time homebuyer req’t) and less paperwork for lenders (e.g., Form 1003 to establish 1 st ‐ time homebuyer status (3 years tax returns not a req’t)); and • Lenders find it more user friendly since TBA is how most mortgage originators fund and hedge their single family programs, so the terms are familiar (more so than a bond program). • In the current market, while tax ‐ exempt markets provide challenges, TBA ‐ based programs enable HFAs to : • Support mission of helping low ‐ income borrowers that have difficulty obtaining credit; • Earn income; and • Maintain lender networks for when tax ‐ exempt MRBs return: • Lender networks are a key component to any HFAs success, and maintaining these networks is vital to the future success of an HFA’s single family program. • When MRB programs do come back in force, TBA can still be a viable product offering for HFAs (broader income limits / non 1 st ‐ time homebuyer). 5
WHAT IS TBA? TBA stands for “ To Be Announced ” and it is a forward sell/buy trade of federally ‐ insured MBS (Ginnie Mae, Fannie Mae, or Freddie Mac) with a stated coupon for an explicit price on a date in the future; the actual MBS security to be bought/sold is not known at the time the initial trade is entered into, and such MBS security is “to be announced” 48 hours prior to actual settlement . • TBA is not a municipal security, so there are no tax ‐ exempt bond restrictions or overlays. • No volume cap requirements / no IRS tax ‐ exempt overlays (e.g., 1 st time homebuyer). • Mortgage originators and banks often use TBA to hedge interest rate risk of their mortgage programs (hedges risk of rates moving between time of loan reservation and MBS sale). • TBA is the 2 nd most liquid bond market in the U.S. (behind U.S. Treasuries). • Notably, following the Lehman crisis the TBA market functioned with relatively little volatility, while tax ‐ exempt MRB markets experienced significant dislocation. Direct TBA trades do expose the HFA to pipeline risk (e.g., fallout risk) and related market risks which is why over 20 state HFAs and nearly all active local HFAs using TBA have partnered with a 3 rd ‐ party provider that shields the HFA from such market and pipeline risk. TBA contracts are considered “investment derivatives” since one or more factors are not known at the time the contract is entered into, causing HFAs that enter into TBA trades directly to disclose such TBA contracts as “derivatives” on their audited financial statements. • HFAs using 3 rd ‐ party programs, such as “Turnkey” which shield HFA from 100% of such risks, do not have the same accounting treatment because the HFA is not entering into TBA trades. 6
DIFFERENCES BETWEEN BOND & TBA-BASED PROGRAMS For tax ‐ exempt single family MRB programs, Section 143 of the Internal Revenue Code & related bond regulations impose a number of stringent requirements, including (1) income limits, (2) purchase price limits, (3) first ‐ time homebuyer requirement, and (4) prohibiting pairing loans with MCCs. TBA ‐ based market rate programs, on the other hand, are funded on a taxable basis, and therefore many of those MRB requirements can be relaxed or eliminated. Homebuyer income limit in MRBs includes all persons in “household” , but for TBA only borrower’s income needed to be considered (TBA expands eligible borrower universe); For HFAs seeking to broaden the universe of eligible homebuyers it is seeking to serve, TBA programs can allow non ‐ 1 st ‐ time homebuyers (e.g., low ‐ moderate income); TBA also makes qualifying as a 1 st ‐ time homebuyer easier (more lender friendly) by not requiring 3 ‐ years of tax returns (e.g., Form 1003 attestation); Because no volume cap is used for a TBA program, eligible borrowers can pair TBA ‐ funded mortgage loans with MCCs (which isn’t allowed with tax ‐ exempt MRBs). MRB programs generally are based on a stated $$ amount (e.g., $25mm), for a stated mortgage rate (e.g., 4.00%), and for a defined origination period (not to exceed 42 ‐ mo’s), and lenders originate MRB loans based on a first ‐ come, first ‐ served basis. TBA ‐ based programs have no fixed program amount, mortgage rate, or origination end date; Rates are set by the HFA each day/week, based on then current markets (so an HFA’s mortgage rate is better able to track current mortgage rates to remain competitive); Program is “evergreen” (continuously funded through TBA with no set $$ ceiling); and Lenders do not have to worry about funds running out / TBA allows continuous lending. 7
COMPARISON OF BOND & TBA/“TURNKEY” EXECUTION PAC Bond Structure Turnkey/TBA Serials, PAC, Terms Origination Period 6 months ‐ level Continuous Program/Bond Par 25,000,000 25,000,000 Premium ‐ 1,225,000 Total 25,000,000 26,225,000 Mortgage Rate 3.770% 3.750% Full ‐ Spread Mortgage Yield 3.775% NA Bond Yield 2.650% NA Spread 1.125% NA PV Issuer Fee/Residual (100% PSA) 1,115,585 NA PV Issuer Fee/Residual (200% PSA) 1,015,928 NA PV Issuer Fee/Residual (300% PSA) 943,204 NA TBA PV Premium Raised ‐ 1,225,000 income not DPA Grant ‐ ‐ subject to PSA Reserve Fund (310,000) NA experience COI (est. $13/bond) (325,000) NA NPV (100% PSA) 480,585 1,225,000 NPV (200% PSA) 380,928 1,225,000 NPV (300% PSA) 308,204 1,225,000 Rates as of 6/28/2016. 8
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